Washington | Rescuing America from the fastest and most extreme economic collapse in the modern era doesn’t mean burning what’s left of the Federal Reserve’s central banking manual.
At the risk of reawakening President Donald Trump’s ire, Chairman Jerome Powell shot down all talk of turning to negative interest rates to address a downturn “significantly worse than any recession since World War II”.
Mr Powell said he and his colleagues made their opposition to negative rates clear in October in what was then a rare bout of complete unanimity.
“The committee’s view on negative rates has not changed,” he told a video conference hosted by the Peterson Institute for International Economics on Wednesday (Thursday AEST). “This is not something we’re looking at”.
He added that the evidence that such measures work is “very mixed”, warned of their potential to disrupt the flows of credit from banks to borrowers, and repeated his preference for already well-worn options including so-called forward guidance – or pledges to do whatever it takes – and ever burgeoning asset purchases.
Mr Powell’s decision to draw a firm line in the sand over the issue came less than 24 hours after Mr Trump urged him to accept the “gift” of negative rates by joining countries that already have them, and after financial markets began last week pricing the once unimaginable possibility of a benchmark cash rate below zero.
“I don’t think any central banker is going to rule out that possibility, but for now he has made it very clear that they’re going to see the course for current policy measures before diving into negative rates,” said Subadra Rajappa, head of US rates strategy at Societe Generale in New York.
Concerns are spreading across America that the country’s failure to bring a rapid end to the coronavirus pandemic means chances the economic damage caused by lockdowns will be deeper and lasting than first hoped.
Mr Powell addressed those concerns, urging Congress to act more aggressively and avoid a wave of otherwise needless bankruptcies and job losses saying they would lead to an “extended period” of weak economic growth.
America’s deathtoll has surged beyond 83,000, with more than 1.3 million cases detected, and closely watched models predict that number will eventually rise to almost 150,000 by early August – a forecast premised on shelter-at-home orders staying in place. That is now highly unlikely as states begin to relax restrictions a growing clamour over the damage they are doing to businesses and jobs.
Recovery may come more slowly
The Fed will later this week release the results of a recent survey that suggests 40 per cent of US households with less than $US40,000 ($62,000) in annual income included someone who has lost a job since February, Mr Powell said.
“There is a sense, growing sense I think, that the recovery may come more slowly than we would like,” he said. “But it will come, and that may mean that it’s necessary for us to do more.”
US interest rates are near zero and the Fed’s balance sheet has ballooned to unprecedented levels as officials accept an increasing array of assets to bolster economic growth.
Mr Powell said the response so far “has been particularly swift and forceful,” he said. But the longer the downturn lasts the harder the recovery will be.
America could find itself in “an extended period of low productivity growth and stagnant incomes.”
“Additional fiscal support would be costly but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery,” he said.
“This trade-off is one for our elected representatives, who wield powers of taxation and spending.”